Aditya Birla Capital Limited (ABCAPITAL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aditya Birla Capital Limited Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Ajay Srinivasan, Chief Executive, Aditya Birla Capital. Thank you, and over to you, sir.

Thank you. Good evening, and welcome, everyone, to this call to declare the results for Q2 and the first half of FY 2021 for Aditya Birla Capital and Subsidiaries. I'm joined by my senior colleagues, Kamlesh Rao, Rakesh Singh, Mayank Bathwal and Balasubramanian, who will make this presentation along with me and then take any questions that you have. I do hope you have access to the presentation we've uploaded because we'll be referring to the data in that set. So let me first begin with Slide 3, which captures the highlights of our performance for the quarter and the half year. In an environment of considerable uncertainty and as the economy started opening up, Aditya Birla Capital through its subsidiaries has achieved robust results in terms of top line, bottom line and in terms of overall quality metrics. In the background with an economy slowly opening up and with concerns all around generally our economic activity, we achieved a consolidated revenue of just under INR 4,900 crores for the quarter, a jump of 14% quarter-on-quarter and year-on-year. Our profit after tax grew faster, and at INR 264 crores of PAT for the quarter, we were up 33% quarter-on-quarter and also up from the PAT of last year. As people worried about connecting with customers and distributors, our life insurance business continued its momentum of the first quarter and has grown 7% over the last year in H1 significantly ahead of the private players who actually declined by 11% over the same period. This gain in market share was also witnessed by us in the group business. Along with the top line, our focus on value creation has meant that our embedded value for the half year has grown by just under 14% year-on-year. With health concerns being upfront and center, our health insurance business continued with strong momentum into the second quarter. We remain the fastest-growing health insurer with our first half GWP growing by 75% to get to INR 550 crores with a very strong focus on retail. Again, our focus on profitability has met with a combined ratio for H1 and decreased to 129% versus 155% for the same period last year. In an environment of considerable market volatility, our asset management business has actually grown very smartly. Our average AAUM grew 11% year-on-year, with equity AAUM growing faster at 13% year-on-year. Our growth was driven by our continued focus on retail, on SIPs and in our focus on B-30 markets. This growth in top line, along with the focus in costs, have driven our profitability higher with the Q2 PBT to domestic AAUM percentage being 27 basis points versus 24 basis points last quarter. As credit growth has slowed significantly in the economy overall, our NBFC lending book has not grown this quarter. However, our focus on growing in our chosen segments of retail and SME, along with other factors, has contributed to our NBFC NIM expanding by 50 basis points quarter-on-quarter to 5.32%. The expansion in margins and our focus on costs has meant that our pre-provision operating profit has grown by 12% quarter-on-quarter, and our PAT has grown by 29% quarter-on-quarter. Similarly, our housing finance business, our focus on affordable housing as a segment has continued. And while the book has been flat over the quarter, our NIM has expanded to 3.33%. Our pre-provision operating profit has grown by 22% quarter-on-quarter. And our PAT is up by 30% quarter-on-quarter. We have focused our efforts in rationalizing our portfolio. And with that, we have seen our other businesses contributing very strongly to our overall profitability. In other businesses, profit grew 2.3x year-on-year, driven by general insurance broking business, our stock booking business and our newly set up asset reconstruction company. We have continued to deploy technology across the board to improve customer experience and our operational efficiency. And if you recall, I covered that in some detail last quarter. Finally, we all know the importance of a brand in a business like ours and the role it plays, especially in the purchase decision. We are therefore delighted to receive the brand of the year award, competing against some household names in the consumer goods segment. I'd now like to move on to Slide 4 and call your attention to only 4 points on this slide. The first point is that, as we've stated in the beginning of this year, we talked about our focus on cost and cost optimization. That has now translated to an 8% decrease in our Q2 OpEx excluding, of course, any volume-related expenses in our health insurance business, which is still building up in terms of scale. This is very much in line with the guidance we have shared at that point in time. Second, as you'll see on the right-hand side of this table, our brand spend has been reduced over time. This actually is a conscious strategy of moving our marketing spend more to digital, which is lower cost after having built the brand through mass media. What I spoke about just now, I believe, is testimony to the strategy actually working. We are now investing in technology and believe that the results of that, too, are beginning to show. Third, as far as the profit numbers on the right-hand side of the table are concerned, I want to make 2 points. First, if you look at the aggregate profit after tax on our profitable businesses, the number of INR 390 crores that you can see, if we adjust for ECL increases, which is because of what is happening in the environment, our PAT actually would have been flat compared to the same quarter last year. Second, if you look at our quarterly profit of INR 264 crores for the quarter, which is significantly ahead of last quarter, as I mentioned, and ahead of the same quarter last year. Last year, Q1 profitability for us was the highest of all the 4 quarters, and it was at INR 270 crores. And subsequently, profitability for every quarter was lower than that. So at INR 264 crores of PAT this quarter, we are nearly at the highest quarterly profit that we hit last year. Moving to Slide 5. I'd like to briefly talk about the multiple advantages of the ABC platform that are visible through the results I've just described. The performance I've just described is evidence of the fact that our diversified platform of businesses with leadership in different segments allowed us to capitalize on different opportunities and deliver strong earnings through different business cycles. We have built scale across our platform, as you can see from the data on the right-hand side. I've already spoken about our brand imperative and the value that plays in our business, so I won't cover that again. But our vast distribution network, our product booking and our large customer ecosystem has led to an active customer base of 20 million, up by 1.8x over just 2.5 years. We have several benefits that we think help us with a really strong retail franchise in this country. And finally, our focus on technology, risk, analytics, talent and our ability to smoothly transfer best practices across the platform are key enablers that continue to drive a competitive advantage. Moving on to Slide 6. This talks about the thinking behind the way we drive technology in our business. I've spoken at some length about some of the things that we've done last time. But I wanted to give you the framework that drives our technology framework, technology initiatives across the platform. We are focusing our technology efforts to drive revenue, to improve customer and distributor advocacy, to optimize cost and to create a robust and scalable platform. I won't go through this slide in the interest of time, but you will note both the capabilities we are building here in each of these areas and the business outcomes that we have delivered in terms of leveraging technology. We will continue to invest in technology to drive revenues up, to improve our advocacy of our customers, to optimize cost on a continual basis and to build a robust and scalable platform. Slide 7 lists some of the awards we won in 2019 and '20. And while I would not like to go through each of these in any detail, I would like you to note that these cover a very broad range of functions and businesses, indicating the excellence we're building across functions and across businesses. I'd now like to hand over to Rakesh Singh, who runs our lending businesses, who will take you through our NBFC and our housing finance business.

Thanks, Ajay. Good evening, everyone. Let me take you through this slide, which summarizes the performance of NBFC business in quarter 2. There are other slides. And if you have any questions, we can take those questions later. Quarter 2 saw revival of new business, and we did a gross disbursement of INR 2,598 crores, which is 2x of what we did in quarter 1, and 64% of what we did in quarter 2 last year. And if we look at the disbursement in September '20, we have bounced back to pre-COVID levels. We did INR 1,108 crores in September compared to that of January, we did INR 1,118 crores. We continue to target retail and SME segments. And these are the segments which are already at 85% of our last quarter disbursement numbers. With the business coming back and the revival in economy coming back, we are looking at growing our NBFC portfolio by 5% in H2 of this year. And once the economy is back on track, we will look at a healthy growth rate in the next financial year. We are focused on portfolio rebalancing and focused on retail and SME. Talking about retail portfolio, it has grown 16% year-on-year and portfolio mix of retail, SME and HNI. HNI, who are the promoter owners of our SME, that is now close to 52% of the overall portfolio. We have been building granularity across our businesses and have reduced the average ticket size across all our customer segments. We have strategically rightsized our large and mid-corporate customers. We have brought down the structured finance by 42% and construction finance by 18%, looking at the current environment. Moving to point #3, portfolio rebalancing and growth in retail business has held the margins to improve by 50 basis points quarter-on-quarter. This has also been helped by a reduction in cost of borrowing. And if we look at the margins compared to year-on-year, we have improved our margins 17 basis points. Our cost/income ratio is very efficient at 30.7%. The pre-provision operating profit has grown by 12% year-on-year at INR 438 crores and is very similar to the quarter 2 numbers of last year. So we are moving closer to the pre-COVID last year numbers. Moving to the point #4, on portfolio quality and collections efficiency, collections efficiency has reached 92% in October, very similar to the pre-COVID number. We have improved our provision cover across stage 1, 2 and 3 assets. Stage 1 and 2 have improved by almost 2x. And if you look at stage 3, provision has improved to almost 45% compared to 33%, which we had last year. We have 1.9x security cover on our net NPA assets, clearly proving that we have adequate provisioning cover. In H2, we are looking at resolving 50% of our stage 3 assets and are also looking at reducing our credit cost and bring it down to 1.2% to 1.3% range from the current level of 1.67%. Talking about how do we utilize the digital assets, lockdown has accelerated the usage of digital assets, and 82% of our new customers were onboarded digitally in quarter 2. 100% of our personal loan customers were sourced, underwritten, disbursed and served digitally. Coming to the final point on liquidity and ALM. Through our efficient borrowing, we reduced our borrowing cost by 26 basis points quarter-on-quarter and 56 basis points year-on-year. We raised INR 1,861 crores of liabilities in H1 this year. In a stress case scenario, even if we assume that we have only 50% of collections efficiency against what we achieved is 92% in October, we are still very, very comfortable, if we stress test the ALM till September next year. We have a very comfortable capital adequacy ratio of 21.6%. We are a AAA-rated NBFC. Now I will move to the housing business, and this is Slide #19, which summarizes the performance of the housing business. Let me summarize the performance for quarter 2. We are focused on granular business, and we have seen a very strong rebound in the logins and the gross disbursements. And if we look at the September logins, these were 129% of previous year. Quarter 2 logins are at 108% of previous year. Talking about disbursement, September '20 disbursements were 100% of previous year. And quarter 2 this year saw 72% of disbursements of -- compared to the last year quarter 2. So clearly, business is rebounding, and we are seeing revival in the business. We have been driving the affordable segment for the last couple of years. Affordable segment, sourcing is now 42% of our overall new business sourcing. Affordable segment home loan book has grown by 33% year-on-year. And this has grown 2.7x over the last 2 years. Looking at the environment, we have reduced our construction finance portfolio by 25% year-on-year. If you look at the overall housing loans -- housing finance portfolio, 96% of our portfolio is in retail. It's completely retail in nature. And the 4% within construction finance has also raised more tickets in our construction finance. Quarter 2 margins have expanded to 3.3% and has improved by 42 basis points year-on-year and 6 basis points quarter-on-quarter. Pre-provision operating profit has grown by 22% quarter-on-quarter to INR 63 crores. Profit after tax has grown by 30% quarter-on-quarter. I will move now to point #4, which is talking about the quality of the book and collections efficiency. We achieved 94% of collections efficiency in October, which is again trending closer to the pre-COVID level. The gross NPA and the net NPA for housing business is at 1.16% and 0.7%, respectively. Here again, we have enhanced our provision cover across stage 1, 2 and 3. Stage 1 has improved by 1.7x. Stage 2 has improved by 5.6x. Stage 3 provision cover has also improved to 37% compared to 27% last year. Lockdown accelerated our usage of digital assets, and 84% of our files were sourced digitally in quarter 2. We onboarded 38% of our total customers through our One ABC portal. Talking about that ALM and the liquidity, through our efficient borrowing, here again, we reduced our cost of borrowing by 57 basis points year-on-year and 15 basis points quarter-on-quarter. We raised INR 850 crores in H1 of this year. And again, if we do a stress case scenario for our ALM and we assume that only 50% of the collections are met against our collections efficiency, which we saw last month of 94% in October, we have a very comfortable ALM till September of next year. We have a very comfortable capital adequacy of 19.33% in the housing business. Again, here, like our NBFC business, we are a AAA-rated housing finance company. So I will stop there, and I will hand it over to Balasubramanian, who is the MD and CEO of our asset management business.

Thanks Rakesh, just to give a quick update on the AMC business growth for the quarter. We have seen a strong revival in the AAUM growth for the quarter ending September 2020, with about 11% quarter-on-quarter growth to close the AAUM at INR 2,38,000 crores of average assets under management. And domestic equity AAUM also grew by about 13% during the quarter to close about INR 82,179 crores. We also see a strong revival in the overall sales activities, backed by a strong investment performance coming from both debt and equity. We have seen a reasonably good pickup on our debt assets under management during the quarter. And with respect to maintaining leadership position in the market, the strong retail franchise that we have built over a period of time continue to help us maintain our overall folio count at 7.2 million, 72 lakh folios that we have continued to maintain. In fact, we are one of the fastest-growing AMC in terms of folio addition in the last 5 years, which has gone up 22% versus the industry growth about 16%, and maintained overall market share at 9.4%, excluding ETF. And the SIP has been a continuous focus for us, where we have seen 9% growth on our quarter-on-quarter basis. And at the same time, we continued to maintain our SIP market share close to about 10%. With respect to the [indiscernible], we've not only grown our size during the quarter, our market share also now stands improved about 10.8%. Building a strong retail franchise has been the big focus area for us last remainder of year. Our retail average assets under management is about INR 49,000 crores, which has grown by about 12% quarter-on-quarter basis. And our focus on building our B-30 continues to yield a good result, where we have seen the growth of 13% [indiscernible] and retail was about 12%. Our new SIP registration during the quarter has shown an improvement of 33%. In fact, the SIP registration for the current quarter is almost about 80% of the last quarter of last year. As a result of that, SIP AUM as a percentage of equity AUM has improved from 38% to about 43%. And in fact, we also had about 1.4 lakh new customers during the current quarter. They can reflect our focus on building our customer base both in offline as well as online. In terms of profitability, we have -- as Ajay mentioned, we have seen an improvement in PBT to AAUM as a percentage. There has been an improvement of 3 basis points from 24 to 27 basis points for the quarter ending. And a strong growth in Q2 PBT about INR 164 crores, about 26% growth quarter-on-quarter on comparison basis from INR 130 crores to INR 164 crores. And our focus on reducing our cost, especially with respect to the OpEx, we have seen a reduction compared to the last year by 11%, which again reflects on focusing on revenue on the one side and keep our costs under control as well as focus on reduction in the cost as far as possible. And the return on equity stayed about 31%, which again, is on the healthy return on equity metrics compared to the asset management that is as a whole. Our focus on digital penetration continues to remain. We have seen a significant improvement in every aspect of digital penetration, whether it is onboarding, whether it is servicing, whether onboarding our customers on the -- through the distribution platform, we have seen a significant improvement. 83% of the new folios have been created digitally. We also ensured we are using the machine learning. We ensured a seamless functioning of all our digital properties to onboard the customers, including using effectively the WhatsApp and Google Assistant for adding more customers to our portfolio. Lastly, with respect to the investors and distributor engagement, this has been one of our key strengths for Aditya Birla Sun Life Mutual Funds last many years. And this is one area where we have been highly focused, given the fact that we are a [ non-bank NP ], and engaging with the distributor and engaging with the customer has been key to our success. And we have conducted many events, both the investor education program as well as distributor engagement program, reached out to the people across the country, and this is given also on the subsequent slides. So more details are given on the other slides. I'm not going to go into the details on that. Any questions that you have -- you may have, that we'll probably take it in the Q&A session. And now I'll hand it over to Kamlesh Rao, MD and CEO of Aditya Birla Sun Life Insurance.

Thank you, Bala, and good evening to all of you. The life insurance industry bounced back from a muted Q1 to a better Q2. However, de-growth for the first half of the year continued both for the industry and for private players was 11%. During the same period, ABSLI actually followed up with good performance in Q2, and we bettered the Q1 and bettered that in Q2. And we registered a 7% growth in individual FYP as compared to the private players, which de-grew by 11%. Also on the group new business premium, we grew by 78% Y-o-Y this year against the private player growth of 12%. Also on the renewal premium, the first half renewal premium actually grew by 19% as compared to last year. And it's not just the growth in the premium, it's also how we collected the premium. So digital collections on renewals actually went up 27% as compared to last year. Box #2 actually focuses on improvement on the quality vectors. So like we said, we have continuous improvement in persistency with a 13-month persistency now at actually 83.1%. That's a growth of 200 basis points Y-o-Y. And we've seen that across from the 13th month right up to the 61st month, the growth. The OpEx-to-premium ratio actually as compared to last year at 20.1% stands for the first half of the year at 14.5%. This is a combination of costs, also the top line being good and the cost being significantly lower as compared to last year. The first half surrender ratio actually is less than half. We had a number of 10.1% last year, first half is down to about 4.5%. If you look at box #3, it talks about the improving margins and the embedded value. The gross margins for Q2 are at 36%. We maintained the gross VNB margin for the first half of the year also at 34.8%, and these are despite falling interest rates. The net VNB margins for the first half of the year are up by 50 basis points. Last year, it was 1.1. It's up to 1.6. And for Q2, we are already at about 6.4%. And we expect by the end of this year, we'll be the early double-digit given the current trends on our net VNB margins. Our embedded value is at INR 5,727 crores as on September, and we registered a growth of close to 13.8% Y-o-Y at the same point of time. Fourth box, while the unlockdown has started, I think sourcing business for us digitally and backed by analytics on existing customers of ours and the banker customer profiles that we have, that continued. And some key highlights are that 95% of our individual business were sourced digitally. We also ensured that the new business came with 80% auto pay, which augurs well for persistency going forward for the new business that we source. The analytics allowed us to get preapproved PASA, we call it, sum assured. It contributed to 11% of the first half year business that we did. We also got in a bot. We call it ZARA for renewal collections, and we actually registered incremental -- 15% incremental collections through ZARA, which is our renewal bot. And if you look at customers facing transactions through WhatsApp and bots and self-service portals now, our monthly interactions are close to about 2.5 lakh plus. That's how we reach out to customers digitally. Box #5 speaks about risk management. We continue to make sure that our expected maturity benefits of our guaranteed portfolio are hedged. They are at about 95%. We regularly monitor them and products get repriced for adjustments in interest rate fluctuations. On overall claims, although we are seeing increasing COVID claims being reported in Q2, the overall claim experience is not adversely affected because of COVID in the first half of '21. You've seen a little surge in Q2, so additional claim provisions are made in view of the COVID-19 basis estimates. Box #6 is on our product launch. In spite of the COVID time, we launched 2 new products from the non-power platform. We've bought in some riders in ULIP, all with the objective of increasing our margins. And success of some of these products was demonstrated by the fact that these 2 new products contributed to greater than 20% of our actual business in Q2 of this year. We continue having a healthy sourcing mix between our proprietary and partnership channels contributing 43 versus 57, 43 on proprietary and 57 on partnerships. And continue maintaining our ULIPs under the desired levels as per our plan. The rest of the slides have all the details, and we'll be happy to take questions in the course after we finish. With this, I hand over to Mayank, who is MD and CEO of our Health Insurance Company.

Thank you, Kamlesh. I'm very happy to present the performance for the health insurance business of Aditya Birla Capital. Quarter 2 continued to be a very good quarter for us, sustaining the momentum that we created in quarter 1. We continue to be the fastest-growing health insurance company in the industry by far, registering a growth of 75% versus the industry growth of 17% and the SAHI growth of 28%. Our total GWP, therefore, grew up to INR 550 crores, with the retail mix growth -- becoming 77% of total portfolio, a growth of close to 10% over last year in the mix results. Retail GWP grew actually 100% and reached to INR 425 crores, covering overall as a business about 9.5 million lives, nearly double of where we were last year. So clearly, we are covering a very large segment of customers. And mainly because of a very unique and differentiated health first business model vis-à-vis the traditional more sickness insurance-based model that we've seen in India. Our core unique -- and a unique offering are focused more on expanding the market rather than just competing for the existing market. And therefore, we have catered newer customer segments like 65% of Indian population below the age of 35 will find more relevance in our offering than we were earlier. People with lifestyle conditions, as we all know, that India is a large population who live with conditions like diabetes, et cetera. And all of this has led to creating first time early consumers of health insurance, creating an average age of our consumers, which is 5 years lower than the industry. What we've also done to ensure that this leads to a much higher level of engagement with our consumer is that not only do we have propositions like incentivizing wellness and all, but because we capture a lot of health data, without converting that into a concept called risk -- health risk score, we call it the Wellbeing Score, it's a very personal score for every customer of ours. And it leads to a very hyper-personalized recommendation and that they can actually do the intervention on our digital health and wellness ecosystem, which comprises of not just physical health, but mental, nutrition and all other health parameters that you can see in the subsequent slides in details that you can see later on. All of this has led to a business outcome, where about 35-odd percent of our customers who've already started engaging with us, we see 20% higher retention and 6% lower claims. If you can even replicate this on the entire mass, and as a hard case, then I think the financial outcomes will be significant. We've been able to take this model to a very large part of the country through our very scaled, but more importantly, diversified and digitally enabled distribution. Banks continue to be our core focus areas with about 66% of our retail business coming from there. Some of the largest banks, as I've mentioned in the past, HDFC, Axis, et cetera, are doing significantly well for us. But we've also grown agency, which is very important for high engagement model like ours, which grew 70%, and we are now covering more than 100-plus locations through our own branches. The other area that we focused on the previous quarter is to work with very large civil platforms, who now suddenly have a great liking for health insurance because it creates a lot of stickiness and conceptualization with the current kind of transaction that is actually getting accentuated on their platform. So we have started working with players like Ola's and MakeMyTrip, et cetera, and we covered more than 2 million lives. And our current run rate is very, very significant especially with players like Ola, where we see a much larger pace as we move ahead and cover the entire base. Around the whole digital team as we work from my colleagues, even at ABHI, given the fact that we were looking at high engagement, digital is a very, very important way to engage with customers at scale. And the entire distributor and customer life cycle is fully digitally enabled, and we have made further investment in tasks like this to see how we can leverage the current trend of customers adopting digital more than ever. We have all kind of platforms, which we leverage, including WhatsApp, multilingual chatbot, et cetera. And we see that the whole engagement becomes much more relevant with our consumers. We also use the data and analytics capability to create business enablers in the areas of higher customer acquisition, retention and a very important area of fraud and with abuse detection, which we know in health insurance is an important area, and we've started seeing significant lifts in all these areas as we have rolled out our analytics engines across these business areas. We have kept a very close and strong eye on the combined ratio. We had given a clear guidance that we are looking at breakeven in the last quarter of next financial year. And our combined ratio in this exit quarter was 126%; for the year -- for the half year, 129%. And we clearly expect that it will be below 110% in the last quarter of this financial year. We have managed COVID claims as well as we can in the current situation. And the good thing is that we are seeing a reducing trend in the month of October. And we have created enough business in the early part of the year when the overall claims were low to deal with the higher claims that the industry saw in the month of September. As we are in the business of risk and as we have grown very large, it's important that we have right risk management practices. At an enterprise level, we leveraged the ABC practices, and there are some specific areas like the whole health risk management right of -- sourcing of right business to managing providers to clinical risk management and fraud, waste and abuse management, as I said, and which -- where we are investing heavily. And the last one is the whole data security risk in line with the emerging data protection bill in India, given the fact that we specifically manage very sensitive customer health data. I'm very happy to answer any question based on the details that we have on subsequent slides. I pass back the mic to Ajay.

Thank you, Mayank. Let me just briefly cover this last slide on other financial services businesses, which shows the increasing contribution of our other businesses. You may note from this slide, the significant growth in profits from these businesses year-on-year with profits for the half year of INR 73 crores in the first half of FY '21 versus INR 39 crores in the first half of FY '20. So this is a 90% growth over -- in this half year over the last half year. So a significant contribution of profitability from these businesses. This has been driven by the strong growth in profits in our general insurance broking business, in our stock broking business and our newly set up asset reconstruction company. I'm referring to Slide 54. So let me now just conclude, I just want to end by saying that all our businesses have demonstrated resilience, nimbleness and flexibility to deal with the unprecedented situation we've all gone through during 2020. The several advantages of the platform that I've mentioned earlier have helped us deliver results, which we believe are very robust, given the environment in which we've operated. We have grown revenues and profitability fairly strongly despite of several challenges that we have faced, and we're fully focused on building on this momentum to drive value and future growth in the second half of this year. So thank you very much for joining this call and for your attention. We'd now be very happy to answer any questions that you might have.

[Operator Instructions] We have a first question from the line of Prashanth Sridhar from SBI Mutual Funds.

Yes. Any numbers on the collection efficiency or bounce rates in your 4 main segments in the NBFC?

So given the collections efficiency overall for the NBFC and in HFC, I don't know whether you missed it, but it's 92% in the NBFC and 94% in the Housing Finance Company.

Okay. And what would be the stage 2 numbers for the NBFC and HFC?

So we haven't booked it out. We're giving you as we've shown that our provision cover for stage 1/stage 2 combined and for stage 3, we don't have the stage 2 disclosure during the year.

Okay. And lastly, any guidance on restructuring or DCCO extensions?

So I think like Rakesh mentioned, there are 2 bits to it. One, some of our existing assets, we're looking at dissolving this year. In the second half of the year. As far as restructuring is concerned, obviously, we are still getting requests, the time available is still in December. But we don't expect it to be a significant part of the book at all. We think it will probably be around 1% of the book, if not, 1% to 2%.

[Operator Instructions] We have next question from the line of Nidhesh Jain from Investec Capital.

Sir, if I look at the COVID provisions on NBFC, that is on the INR 139 crores cumulative and COVID provisions on housing finance is INR 30 crores cumulative. Are these the right numbers?

Yes, those are the right numbers.

Sir, how do we see the adequacy of these provisions going forward? Do we expect more provisions to be created in these 2 books? And if you give some data around what percentage of our loan book has not paid any installment in the month of September or October so that can give us some indication of the COVID-related credit costs which will come in future, and then we can compare that with your provisions, whether the provisions are adequate or not? That should be somewhat helpful.

So I think, Nidhesh, that's why we gave 2 pieces of information to answer that query that you had. One is to talk about the provision coverage in general for stage 1 and stage 2, and you'll see both in NBFC and HFC, we've increased our provision coverage fairly substantially. It's covered in our NBFC and has gone up much more than that in our HFC. So I think that coverage itself increasing should give you some sense of the security that we've dealt over there. And the second, I think Rakesh referred to a guidance in terms of credit cost for H2, which we're expecting to come down over what we have in H1. So H1 is about 1.67%. Rakesh mentioned 1.2% to 1.3% as credit cost in the second half. So I think that will give you a sense of what we are seeing and what we are expecting. So all the information you had asked for ultimately will lead to that number itself.

And what would be the credit cost guidance for Housing Finance Company for H2?

So that should also come down, Nidhesh.

Got it. And how are we looking at loan growth in H2? I think you guided that there will be a 5% growth in H2 in NBFC. That 5% is on September base?

Yes.

And is it similar -- I mean, any indication on the housing finance book?

Yes, Nidhesh, we are trying to change the portfolio mix, and we are focusing a lot on the affordable. So I think -- see, the prime housing loans is slightly higher ticket size. So we are not giving a guidance in terms of the growth. So we are seeing a very strong momentum in terms of the log-ins and disbursements both, but the focus is more towards the granularity and to the affordable segment. I think as things open up, the late financial year, definitely, we should see a strong growth in housing as well.

Sure, sir. And moving to the life insurance, there, I've seen that there has been a sharp increase in the non-PAR products in our mix. So despite that, our gross margins have not moved up. I see that the share of PAR has come down and share of non-PAR has gone up. So what is the reason for that?

So Nidhesh, as I explained, we launched 2 new products, just the timing, and those 2 products actually were pretty successful, contributed to 20% of our business in Q2. So that's how the non-PAR number for the first 6 months is higher. Margins are looking -- I mean, Q2 margins are at 36% despite falling interest rates. The margins are pretty healthy. But like I said, we have plans to bring that back. Our plans are to be in the range of 45% on non-PAR. And through the year, we'll be back to those levels by the end of the year.

And then lastly, on the health insurance, do we see any tail risk of the COVID claims coming in Q3 or Q4? Because I think in H1, we have some -- we have got some benefit of -- on COVID-related claims, but how do we see that panning out in H2?

Yes. So to some extent, Nidhesh, I mean, it's something that we all have to watch and see. But so far, the good news is that, as you know, at a country level, the infection rate is half in the month of October now. So the current trending is half of what it used to be at the peak in September. So if this trend has got anything to say, then I think we're doing okay because what is also happening is that the performance of the other claims continue to happen. So it's not that the other claims have come back at the original level. So there is a bit of a reduction in the claims. But we have to watch out for it because this is something which is unknown, and we don't know at what pace it will -- any increase happens. So we'll have to watch -- wait -- watch and see.

The October is basically..

October is, like, half in terms of the new infection rate. So that trending we have already started seeing, and I think, clearly, at a country level, no one is expecting the rates to go back to the September level. We'll have to see how -- where it goes finally.

[Operator Instructions] We have next question from the line of Manish Poddar from Nippon AIF.

Just had one question. So would you be able to help us with the collection efficiency in both the businesses in September? I believe you've given the number for October? So how was it in September?

So September was 90%, which has gone to 92.2% in October for NBFC. And for housing, it was 92%, which has gone to 94.23%.

Okay. And when you're saying collection efficiency in the NBFC book, is it largely similar across the broad segments?

Yes. So I think across the segment, yes, corporate is slightly higher, but retail and SME, we have seen closer to 89%, 90%. That's what the collection rate efficiency is.

[Operator Instructions] We have next question from the line of Bhavik Dave from Nippon India Mutual Funds.

Sir, one question that I had was regarding your -- on the retail side, where you are seeing good growth. So just on the unsecured part of the business, how is collection efficiencies there or how is the customer behavior there? Because what we understand from different bureaus or a different partner in the system, because unsecured is doing worse off than secured. So from your perspective, in your book, how is the unsecured PL performing qualitatively, if you could give us some color around that. This is like a reasonable part of our retail book.

So as I mentioned, retail is close to 90% collections efficiency, which we have seen. Also, if I want to just give you more color on our retail book and unsecured book, close to 80% of our business loans, which is unsecured, is guaranteed by CGTMSE by SIDBI. So that piece is also there. So -- and we pay a premium on that on our annual basis. So that's also guaranteed. But to answer your question 90% is the collections efficiency.

And when you mentioned 92% in October, what was this number like mid-, pre-COVID because like in the normal case scenario, was it 95% and that 5% that used to bounce used to be collected within the month. Is that a fair assumption?

Yes. So the pre-COVID was 95%, 96%. So every month, we are seeing 2% to 3% improvement. So our sense is in the next couple of months, we should come back to the pre-COVID numbers of 96%, 97%.

Understood. Understood. And sir, on your cost-to-income or the OpEx-to-assets ratio or your NBFC business, there, the numbers are pretty impressive at 1.6%, 1.7% of OpEx-to-assets. Generally, NBFCs work at a higher OpEx-to-assets when they get into retail, so like technically at 2%, 2.5%. So if you could just explain, are we getting -- become more retail and granular in nature, will this number inch up or technology has helped us to limit this to around sub-2% levels as we go ahead retailizing our book?

Our goal is to be sub-2%. And clearly, we are building a very lean model. We are using our ABC distribution across the Tier 3, Tier 4 markets where we have life insurance branches or asset management branches. So we are putting our sales teams in those branches, so -- and also use of technology, as you rightly mentioned. So we have build up state-of-the-art digital lending platform. And there, we really try and onboard customers on most of the processing, which is done digitally. So purely, that's what our idea is to manage the cost.

[Operator Instructions] We have next question from the line of Alpesh Mehta from Motilal Oswal.

And congrats for a good set of numbers. First question is related to the AMC business. Sequentially, has there been any impact on the mark-to-market related to the investments on the top line?

No. On the top line, there is none. I think if you are referring to the AMC surplus, it's only a positive contribution because the mark-to-market increase on the investment that we have made. But if you look at it from the mutual fund portfolio point of view, there is no incremental issues with this or any of the investments that we have in the portfolio. I don't know which one you're referring to, yes.

No, Bala sir, I was just referring -- no, I was just referring to the revenues number because on a sequential basis, it's up almost 12% from 1Q to 2Q. So just wanted to check, has there been any impact of the mark-to-market? Or it's just that the slight improvement in the equity AUM that has led to this kind of an increase in [Indiscernible]?

Yes. I understand this. See, revenue growth is coming on account of, one, increase in AUM because of the mark-to-market action. The second is increase in the profitable asset class in [indiscernible], where we have grown our schemes in the high-margin assets in the [indiscernible]. And the third is marginal improvement on the overall -- the expense management. This is a combination of other 3. There is no doubt the increase in market also has attributed to the overall revenue increase.

Okay. And earlier, we used to run, at least in FY '20, on a quarterly basis, we used to run with a cost of around INR 140 crores on an average. Now in this quarter, it has come down to almost INR 105 crores. How much of this you see that as sustainable -- the decline as sustainable? Or how should we factor in this line item going forward?

Yes. So there has been a clear focus that is being given on the operating cost management, right, from people costs as well as to the distribution costs, and whatever services -- including the admin costs that you have taken. Some of them like the rental cost and, I think, the admin cost rate of staff will become more or less permanent, unless until you see, I think, changing completely over a period of next 1 or 2 years. And people costs, anyway, we've been keeping under control, or probably, we're going to maintain it, and then use the existing resources to actually build away any other business activities. With respect to the selling and commission cost, anyway, mostly everything goes to the schemes. Therefore, I don't see any incremental impact that's coming on the basis of that. Maybe I would say we would probably work more towards bringing in some more efficiency on the cost/income ratio.

Okay. The another question that I have is on the lending businesses, so especially, on to the NBFC business. Is the large corporate segment, while we are focusing more on the retail and SMEs and looking at the current situation as with the restructuring which is likely to go up at least in the second half of the year, not for us, but at the system level, do you see better opportunities coming up for the structured finance or the project loan-related businesses? And would you be open to take that? Or you will just focus on the retail and the SME segment and continue to consolidate this book?

So Alpesh, like we've said before, we are -- we look at this segment more opportunistically. If there are good opportunities from a risk-averse perspective, we will look at it. I don't -- I think Project finance, we are quite open to looking at because we know the cash flow is always good, and we always are good at tracking of cash flow. So it goes well from our credit perspective, in fact. And I -- in fact, we've never had a problem on any project finance assets so far because we don't take a project at a very early stage. We take it when we are really -- cash flows are reasonably visible, and therefore, we've never had a problem. I think structured finance will have to be a little bit more -- I can't give you a generic answer to that because it really depends on the specific transaction. We need to make sure that we are protected from refinance risk because that risk has increased significantly in the markets in which we're operating. So subject to that being under control, I think we will look at that as well.

Okay. And lastly, my last question is on the real estate side. Just at the system level, can you just throw some light how the real estate exposure at the system level is? What is the situation for the real estate exposure? Do you see major restructuring or the things have come back to the normal on that front?

So Rakesh will add. But when you're talking about real estate, you're talking about developer financing activities?

Developer financing, yes, yes, yes.

So it's a very small part of both our groups, but Rakesh can give you more color on the quality of that book.

So as Ajay mentioned, it's around 5% of our overall portfolio. So it's a very small part, both in housing, it's 4%; and here, it's 5%. So clearly, we have done in a very selective basis and to the best of the developers. In terms of any restructuring, no, there are 1 or 2 accounts where on a very few of them, in terms of the DCCO extension where the project has been delayed because of the lockdown and because of shortage of the laborers and all, which has been allowed by RBI. So those are the only fee accounts, which we are looking at. Otherwise, no. There's no request of restructuring.

We have next question from the line of Shravan Vohra, an investor.

I would like to congratulate you on a good set of numbers. I just wanted to understand more about the life insurance and health insurance business and the good growth that we're seeing there. Is it more from like -- is it seeing an overall growth or more from, say, Tier 3 and Tier 4 cities?

You're asking geographically, Shravan, where the growth is coming from? You're asking whether the growth is coming more from Tier 3 or Tier 4?

Yes, for the health insurance and the life insurance businesses.

Sure. So on the life insurance side, there are profits from there. I think the major metro contribution, big ones, is contributing more as compared to Tier 3, Tier 4. I think in light of what's happening the -- I see changes in the risk-averseness in also -- both have gone up across the country. But we see a larger uptick in the Tier 1 and Tier 2 cities, and that's what is contributing to the group. Therefore, digitally, if you're present there, which is something that we are working on very, very strongly. And that is also contributing a large part of our business at this point of time. That is why, we are seeing in spite of the industry de-growing, there's growth in -- on the life insurance side on these 2 accounts. I'll hand it over to Mayank for his comments.

Yes. Rakesh, in one of the slides, he's given the details. Our non-metro business has improved from 60% -- the share of business from non-metro locations was 60% first half last year or 63% first half this year. So clearly, beyond the metro locations, we have seen some increase in sales proportion and a lot of that is also because some of our partners like Axis and ABFL has now become very -- fully, 100% active in these locations, and therefore, give us access to locations where, possibly, we didn't have served last year. And we're seeing very good growth in these locations as well.

And sir, like, I've been mentioning this to you, I've asked many times over previous calls also that, sir, our performance has been good over how challenging times we have had in the last few years, but the market share doesn't seem to recognize that. We've been able to raise money at very competitive good market value by very marquee investors? But like, in the secondary market, there doesn't seem to be any traction for our company. So like, how do we plan to address this, I don't know, communication gap or this issue?

Shravan, you've written to me also, and I remember responding to your e-mail on the same question. I think my answer is not going to be different to what I've told you in the e-mail, which is that we believe that the market will recognize the value of the franchise we have. And if it doesn't, then we would have to do what say -- what it takes to make sure that the value is unlocked because, at the end of the day, that's what our shareholders are looking for. That's why I responded to you earlier as well as my response is going to be the same now as well.

We have next question from the line of Kislay Upadhyay from Abakkus Asset Manager (sic) [ Abakkus Asset Management ].

My question is on the channel mix in the life insurance business. I see opposing trends in the proprietary and partnership channel. Could you comment on the same? And how the trend is going to be going ahead?

So we had planned for, in the COVID year, prospecting new agents and new customers, a significantly more difficult. Large part of business in life insurance also comes out of the new agents that you get in the year. And in the scenario that we are in, I think that has not worked as well as we would like it to. In spite of that, if you look at the proprietary business, it's doing pretty well. And its on plan. Obviously, on a banca counter, because digital works better, and we've been able to, like I said, more analytics on customer profiles. So prospecting from that point of view becomes more easier, and it's faster. So there is a 43% coming from proprietary and 57% from partnership. But like I said, in times where prospecting for both new customers and agents is difficult, I think it's a very decent mix in this kind of time. But like I said, going forward, when things open up, with digital that we are putting in, in both the places, I think that mix will continue remaining in the same range. Half-half is what you prefer, but typically, 45/55 is the range that it will be on an incremental side.

Okay, sir. Sir, how has this trend been -- trend between Q-on-Q, has the proportion been different in Q2 compared to Q1 in the direction that we wanted to be? Because the numbers here are for H1 and H2.

Yes. Yes. They are [indiscernible]. And they had significantly different impact in Q2. With the lockdown opening up, the contribution from the proprietary business actually has gone up and has been better. And we think that for Q3 and Q4, there will be some catch-up even in that area as far as the proprietary business is concerned.

Okay. And sir, if you could mention what proportion of our proprietary is digital?

Like I said, I think in the scenarios that we are in, I mean, 95% of the total business that we have sourced has been sourced digitally. And that's the trend that we have right now because meeting customers and all the stuff is significantly more difficult. But our infrastructure allows both advisers as well as banca partners to actually complete the entire transaction digitally. Our renewal ability to collect premiums, also our digital collections have gone up significantly, which I mentioned are about close to 27% up as compared to last year. So in these times, close to, like I said, 95% of our business for the first half of the year has been sourced digitally.

Okay, great. Sir, I have another question on the NBFC business. The yields on AUM have come down, Y-o-Y, but improved sequentially. How much of this can be attributed to mix in the AUM? And how should we read it -- this number to be going ahead in the next few quarters because there might be market opportunities and market share gain opportunities, and you might be able to charge better? Or do we pass on the benefits, given our costs have come down?

We should see improvement in yields. What you see, the, I think, reduction year-on-year is because of reversal on our stage 3 assets, and that is the reason why it's come down. Otherwise, on the new sourcing because we are focusing more on retail and SME, we should see improvement in yields.

We have next question from the line of Nidhesh Jain from Investec Capital.

Sir, can you share the quantum of disbursement, if any, we have done under credit guarantee scheme in the NBFC and housing plans?

[Indiscernible] credit.

Yes.

INR 700 crores plus -- INR 750-odd crores we have done.

NBFC.

NBFC. And housing, it will be a small amount. So I don't have it readily available, Nidhesh, I can share that with you.

[Operator Instructions] Ladies and gentlemen, due to time constraint, that was the last question. I'd now like to hand the conference over to Mr. Ajay Srinivasan for closing comments. Over to you, sir.

Thank you very much. Thank you all for joining this call and for listening in and asking your questions. If you have any further questions that you have, please write it to any of us or to Pramod Bohra. We'd be happy to get back to you. Thank you, and have a good evening.

Thank you, sir. Ladies and gentlemen, on behalf of Aditya Birla Capital Limited, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.